SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 0-10888 OLD NATIONAL BANCORP (Exact name of Registrant as specified in its charter) INDIANA 35-1539838 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Main Street, Evansville, Indiana 47708 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code, (812) 464-1200 Former name, former address and former fiscal year, if changed since last reports. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock. The Registrant has one class of common stock (no par value) with approximately 46.1 million shares outstanding at March 31, 1999. OLD NATIONAL BANCORP FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page No. Consolidated Balance Sheet March 31, 1999 and 1998, and December 31, 1998 3 Consolidated Statement of Income Three months ended March 31, 1999 and 1998 4 Consolidated Statement of Cash Flows Three months ended March 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II OTHER INFORMATION 14 SIGNATURES 16 INDEX OF EXHIBITS 17 2 <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED BALANCE SHEET March 31, March 31, December 31, ($ in thousands) (unaudited) 1999 1998 1998 Assets <S> <C> <C> <C> Cash and due from banks ---------------------- $135,504 $145,277 $165,094 Money market investments---------------------- 27,372 9,311 16,699 Investment Securities U.S. Treasury ------------------------------ 81,002 113,296 92,741 U.S. Government agencies and corporations ------------------------ 1,105,102 972,176 995,492 Obligations of states and political Subdivisions ---------------------------- 511,780 452,982 491,139 Other -------------------------------------- 55,956 50,118 57,302 --------- --------- --------- Total Investment Securities ------------- 1,753,840 1,588,572 1,636,674 --------- --------- --------- Loans Commercial --------------------------------- 1,071,652 916,798 1,027,792 Commercial real estate --------------------- 971,407 778,186 944,813 Residential real estate -------------------- 1,736,648 1,543,900 1,688,572 Consumer credit, net of unearned income ---- 699,780 710,241 693,079 --------- --------- --------- Total Loans ----------------------------- 4,479,487 3,949,125 4,354,256 Allowance for loan losses --------------- (54,487) (50,639) (51,847) --------- --------- --------- Net Loans ------------------------------- 4,425,000 3,898,486 4,302,409 Other assets --------------------------------- 301,302 372,747 295,735 --------- --------- --------- Total Assets ---------------------------- $6,643,018 $6,014,393 $6,416,611 ========= ========= ========= Liabilities Deposits Noninterest bearing demand ----------------- $515,176 $493,377 $553,704 Interest bearing: NOW accounts ---------------------------- 516,250 484,093 539,169 Savings accounts ------------------------ 516,270 505,058 501,780 Money market accounts ------------------- 678,566 653,171 678,484 Certificates of deposit $100,000 and over ----------------------- 449,877 396,214 390,123 Other time ------------------------------ 2,116,555 1,983,725 2,005,598 --------- --------- --------- Total Deposits -------------------------- 4,792,694 4,515,638 4,668,858 --------- --------- --------- Short-term borrowings ------------------------ 566,767 388,952 506,320 Other borrowings ----------------------------- 659,153 502,863 629,868 Accrued expenses and other liabilities ------- 89,131 90,409 91,920 --------- --------- --------- Total Liabilities -------------------------- 6,107,745 5,497,862 5,896,966 --------- --------- --------- Shareholders' Equity Common stock ------------------------------- 46,131 29,498 30,388 Capital surplus ---------------------------- 352,376 308,251 350,256 Retained earnings -------------------------- 123,884 161,577 119,902 Accumulated other comprehensive income, net of tax ----------------------- 12,882 17,205 19,099 --------- --------- --------- Total Shareholders= Equity ------------------ 535,273 516,531 519,645 --------- --------- --------- Total Liabilities and Shareholders' Equity ----------------------------------- $6,643,018 $6,014,393 $6,416,611 ========= ========= ========= The accompanying notes are an integral part of this statement. </TABLE> 3 <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF INCOME Three Months Ended ($ and shares in thousands except March 31, per share data) (Unaudited) 1999 1998 <S> <C> <C> Interest income Loans including fees: Taxable ----------------------------------- $89,329 $84,704 Non-taxable ------------------------------- 1,735 1,258 Investment securities: Taxable ----------------------------------- 18,802 19,057 Non-taxable ------------------------------- 6,200 5,692 Money market investments -------------------- 389 604 ------- ------- Total Interest Income --------------------- 116,455 111,315 ------- ------- Interest Expense Savings, NOW and money market accounts --------------------- 10,326 11,527 Certificates of deposit of $100,000 and over ---------------------------------- 5,787 5,636 Other time deposits ------------------------- 27,255 27,186 Short-term borrowings ----------------------- 5,946 5,200 Other borrowings ---------------------------- 9,078 5,929 ------- ------- Total Interest Expense -------------------- 58,392 55,478 ------- ------- Net Interest Income ----------------------- 58,063 55,837 Provision for loan losses ------------------- 2,803 3,079 ------- ------- Net Interest Income After Provision For Loan Losses --------------------------- 55,260 52,758 ------- ------- Noninterest Income Trust fees ---------------------------------- 3,478 3,244 Service charges on deposit accounts---------- 4,207 4,132 Loan servicing fees ------------------------- 1,273 1,596 Insurance premiums and commissions ---------- 1,328 1,352 Investment product fees --------------------- 1,313 1,178 Bank-owned life insurance ------------------- 1,100 153 Securities gains net ------------------------ 1,321 45 Other income -------------------------------- 2,061 2,147 ------- ------- Total Noninterest Income ------------------ 16,081 13,847 ------- ------- Noninterest Expense Salaries and employee benefits -------------- 25,249 23,542 Occupancy expense --------------------------- 2,591 2,381 Equipment expense --------------------------- 3,236 3,244 Marketing expense --------------------------- 1,327 1,378 FDIC insurance expense ---------------------- 187 186 Data processing expense --------------------- 1,433 1,397 Supplies expense ---------------------------- 1,020 1,035 Communication and transportation expense 1,831 1,861 Other expenses ------------------------------ 6,764 5,676 ------- ------- Total Noninterest Expense ----------------- 43,638 40,700 ------- ------- Income from continuing operations before income taxes ----------------------- 27,703 25,905 Provision for income taxes ------------------ 7,693 7,930 ------- ------- Income from continuing operations ----------- 20,010 17,975 Loss from discontinued operations ----------- 0 (661) ------- ------- Net Income ---------------------------------- $20,010 $17,314 ======= ======= Income from continuing operations per common share Basic ------------------------------------- $0.43 $0.39 ===== ===== Diluted ----------------------------------- $0.42 $0.38 ===== ===== Net income per common share Basic ------------------------------------- $0.43 $0.38 ===== ===== Diluted ----------------------------------- $0.42 $0.37 ===== ===== Weighted average common shares outstanding: Basic ------------------------------------- 46,073 45,773 ====== ====== Diluted ----------------------------------- 47,880 48,308 ====== ====== The accompanying notes are an integral part of this statement. </TABLE> 4 <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31, ($ in thousands) (unaudited) 1999 1998 <S> <C> <C> Cash flows from operating activities: Net income ------------------------------------------------- $ 20,010 $ 17,314 -------- -------- Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation --------------------------------------------- 2,656 2,532 Amortization of intangible assets ------------------------ 394 452 Net premium amortization on investment securities -------- 548 539 Provision for loan losses -------------------------------- 2,803 3,079 Gain on sale of investment securities -------------------- (1,321) (45) Gain on sale of assets ----------------------------------- (17) (259) (Increase) decrease in interest receivable --------------- (371) 320 Increase in other assets --------------------------------- (4,796) (92,869) Increase in accrued expenses and other liabilities ------------------------------------- 959 9,844 -------- -------- Total adjustments ------------------------------------- 855 (76,407) -------- -------- Net cash flows provided by (used in) operating activities 20,865 (59,093) -------- -------- Cash flows from investing activities: Cash and cash equivalents of subsidiary acquired ----------- 5,914 -- Purchase of investment securities available-for-sale ------- (418,343) (132,794) Proceeds from maturities and paydowns of investment securities available-for-sale ---------------------------- 208,945 102,385 Proceeds from sales of investment securities available- for-sale ------------------------------------------------- 101,070 49,190 Net principal collected from (loans made to) customers: Commercial and financial --------------------------------- (36,226) (13,924) Mortgage ------------------------------------------------- (68,930) (59,067) Consumer ------------------------------------------------- (5,599) 15,062 Proceeds from sale of mortgage loans ----------------------- 3,540 23,333 Proceeds from sale of premises and equipment --------------- 116 278 Purchase of premises and equipment ------------------------- (2,614) (3,112) -------- -------- Net cash flows used in investing activities -------------- (212,127) ( 18,649) -------- -------- Cash flows from financing activities: Net increase (decrease) in deposits and short-term borrowings: Noninterest bearing demand ------------------------------- (55,672) (32,581) NOW Accounts --------------------------------------------- (22,919) (3,781) Savings accounts ----------------------------------------- 11,260 594 Money market accounts ------------------------------------ 82 (23,567) Certificates of deposit $100,000 and over ---------------- 57,719 15,960 Other time deposits -------------------------------------- 97,584 38,003 Short-term borrowings ------------------------------------ 60,447 (53,733) Other borrowings ----------------------------------------- 29,285 122,420 Cash dividends paid ---------------------------------------- (7,248) (6,410) Common stock repurchased ----------------------------------- (2,786) (10,507) Common stock reissued, net of shares used to convert subordinated debentures ---------------------------------- 4,593 6,689 -------- -------- Net cash flows provided by financing activities ---------- 172,345 53,087 -------- -------- Net decrease in cash and cash equivalents ------------------ (18,917) (24,655) Cash and cash equivalents at beginning of period ----------- 181,793 179,243 -------- -------- Cash and cash equivalents at end of period ----------------- $162,876 $154,588 ======== ======== Total interest paid -------------------------------------- $ 58,987 $ 55,854 ======== ======== Total taxes paid ----------------------------------------- $ 7,150 $ 860 ======== ======== The accompanying notes are an integral part of this statement. </TABLE> 5 Old National Bancorp Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Old National Bancorp and its affiliate entities (ONB). All significant intercompany transactions and balances have been eliminated. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary to present fairly the financial position of ONB as of March 31, 1999 and 1998 and December 31, 1998, and the results of its operations for the three months ended March 31, 1999 and 1998 and its cash flows for the three months ended March 31, 1999 and 1998. All prior period information has been restated for the effects of business combinations accounted for as pooling-of-interests as discussed in Note 3. 2. Net Income Per Share Net income per common share computations are based on the weighted average number of common shares outstanding during the periods presented. A 5% stock dividend was paid January 28, 1999 to shareholders of record on January 7, 1999. On April 15, 1999, a three-for-two stock split was declared to shareholders of record on May 3, 1999. The dividend will be paid May 24, 1999. All share and per share data presented herein have been restated for the effects of the stock dividend and stock split. Net income on a diluted basis is computed as above and assumes the conversion of ONB's 8% convertible subordinated debentures (Note 5). For the diluted computation, net income is adjusted for the assumed reduction in interest expense, net of income tax effect, and an additional common shares 1.7 million year-to-date, are assumed to be issued in connection with the conversion of the remaining outstanding debentures. Earnings Per Share Reconciliation ($ and shares in thousands except per share data): For the three For the three months ended months ended March 31, 1999 March 31, 1998 Per-Share Per-Share Income Shares Amount Income Shares Amount Basic EPS Income from continuing operations available to common stockholders $20,010 46,073 $0.43 $17,975 45,773 $0.39 ===== ===== Effect of Dilutive Securities: Stock options 104 238 8% convertible debentures 263 1,703 348 2,297 -------- ------ ------- ------ Diluted EPS Income from continuing operations available to common stockholders + assumed conversions $20,273 47,880 $0.42 $18,323 48,308 $0.38 ======= ====== ===== ======= ====== ===== 6 3. Merger and Divestiture Activity Completed Mergers On Januray 29, 1999, ONB and Southern Bancshares LTD (Southern) of Carbondale, Illinois, consummated a merger in which ONB issued 2,552,436 common shares in exchange for all of the shares of Southern. This transaction was accounted for as a pooling-of- interests. Net income for Southern prior to merger included in these statements for the period ended January 29, 1999 was $332 thousand. On February 5,1999 ONB and Dulaney Bancorp (Dulaney) of Marshall, Illinois, consummated a merger in which ONB issued 472,284 common shares in exchange for all the shares of Dulaney. This transaction was accounted for as a pooling-of-interests without restatement of prior years due to immateriality. Discontinued Operations In April 1998, ONB announced it would look at exit strategies from its sub-prime lending affiliate, Consumer Acceptance Corporation (CAC). During June 1998, ONB finalized the sale of CAC's sub-prime auto loans, which closed in July 1998. ONB has accounted for this entity as discontinued operations on the consolidated financial statements. Net assets of the entity which were included in other assets were $84.7 million at March 31, 1998. Loss from discontinued operations for the three months ended March 31, 1998 was as follows ($ in thousands): Three Months Ended March 31, 1998 Loss before taxes from operations of discontinued operations $(1,111) Income tax benefit (450) -------- Loss from operations of discontinued operations (661) -------- Loss from discontinued operations $(661) ======= Loss from discontinued operations per common share Basic $(0.01) ======= Diluted $(0.01) ======= 4. Investments The market value and amortized cost of investment securities as of March 31, 1999 are set forth below ($ in thousands): Market Value Amortized Cost Available-for-sale, at market value $1,753,840 $1,732,629 5. Borrowings ONB has outstanding $22.0 million of 8% convertible subordinated debentures which are due September 15, 2012, unless previously converted or redeemed. The debentures are convertible at any time prior to maturity into shares of common stock of ONB at a conversion rate of 77.519 shares for each one thousand dollars 7 principal amount of debentures. Interest on the debentures is payable on March 15 and September 15 of each year. The debentures are redeemable in whole or in part at the option of ONB at par value. Beginning September 15, 1998, debenture holders are entitled to an annual sinking fund contribution of $2.5 million principal amount of debentures less conversions and redemptions. The debentures are subordinated in right of payment to all senior indebtedness of ONB. As of March 31, 1999, 1.7 million authorized and unissued common shares were reserved for conversion of the debentures. ONB has registered Series A Medium Term Notes in the principal amount of $50 million. The series has been fully issued. As of March 31, 1999, a total of $32.0 million of the notes were outstanding, with maturities ranging from one to four years and fixed interest rates of 6.7% to 7.1%. At March 31, 1998, ONB had outstanding $34 million of medium term notes. ONB also has registered Medium Term Notes in the principal amount of $150 million. These notes may be issued with maturities of nine months or more and rates may either be fixed or variable. As of March 31, 1999 and 1998, a total of $64.3 million of the notes were outstanding, with maturities ranging from one to nine years and fixed interest rates from 6.4% to 7.0%. As of March 31, 1999, ONB has $80 million in unsecured lines of credit with unaffiliated banks. These lines of credit include various informal arrangements to maintain compensating balances. The compensating balances are maintained for the benefit of the parent company by affiliate banks which normally maintain correspondent balances with these unaffiliated banks. As of March 31, 1999, no balance was outstanding under these lines. As of March 31, 1998, $19.0 million was outstanding. 6. Interest Rate Contracts ONB uses interest rate contracts such as interest swaps and caps to manage its interest rate risk. These contracts are designated as hedges of specific assets and liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset or liability. The premium paid for an interest rate cap is included in the basis of the hedged item and is amortized as an adjustment to the interest income or expense on the related asset or liability. At March 31, 1999, ONB has interest rate swaps with a notional value of $65 million. The contracts are an exchange of interest payments with no affect on the principal amounts of the underlying hedged liability. The fair value of the swaps were $(1.4) million as of March 31, 1999. ONB pays the counterparty a variable rate based on three-month LIBOR and receives fixed rates ranging from 5.375% to 7.0%. The contracts terminate on or prior to January 28, 2009. At March 31, 1999, ONB has an interest rate cap agreement (cap) with a notional amount of $8 million with no fair value. These caps are indexed to LIBOR with a strike price of 5.00% and mature in 1999. The carrying value at March 31, 1999 was $0.1 million. ONB is exposed to losses if a counterparty fails to make its payments under a contract in which ONB is in the receiving position. Although collateral or other security is not obtained, ONB minimizes its credit risk by monitoring the credit standing of the counterparties and anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. 8 7. Comprehensive Income Three Months Ended March 31 March 31 1999 1998 ($ in Thousands) Net income $20,010 $17,314 Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax (5,424) 563 Less: reclassification adjustment for (gains) losses realized In net income, net of tax (793) (27) -------- ------- Net unrealized gains (6,217) 536 -------- ------- Comprehensive income $13,793 $17,850 ======== ======= 8. Segment Data Community Banking Other Total March 31,1999 Net interest income $58,892 $(829) $58,063 Income tax expense (benefit) 8,850 (1,157) 7,693 Segment profit (loss) 20,993 (983) 20,010 Total assets 6,568,683 74,335 6,643,018 March 31, 1998 Net interest income $56,882 $(1,045) 55,837 Income tax expense (benefit) 8,958 (1,028) 7,930 Segment profit (loss) 19,590 (1,615) 17,975 Total assets 5,923,388 91,005 6,014,393 7. Impact of Accounting Changes In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for ONB). ONB doesn't expect the impact of this statement will be material to the results of operations or its financial position, due to its limited use of derivative instruments. 9 PART I. FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following management's discussion and analysis is presented to provide information concerning the financial condition of ONB as of March 31, 1999, as compared to March 31, 1998 and December 31, 1998, and the results of operations from continuing operations for the three months ended March 31, 1999 and 1998. Financial Condition ONB's assets at March 31, 1999 were $6.643 billion, a 10.4% increase since March 1998 and a 3.5% increase since December 1998. Earning assets, which consist primarily of money market investments, investment securities and loans, grew 12.9% over the prior year. During the past year, the mix of earning assets reflected loan growth of 13.4% while money market investments and investment securities increased a combined 11.5%. Since December 1998, earning assets increased 4.2% with loans growing 2.9% and investment securities and money market investments increasing 7.7%. At March 31, 1999, total under-performing assets (defined as loans 90 days or more past due, nonaccrual and restructured loans and foreclosed properties) decreased slightly to $23.6 million from $25.1 million as of December 31, 1998. As of these dates, under-performing assets in total were 0.53% and 0.58%, respectively, of total loans and foreclosed properties. March 31, December 31, 1999 1998 Nonaccrual loans $16,203 $17,034 Restructured loans 173 116 Foreclosed properties 3,107 2,542 ------- ------- Total Non-performing Assets 19,483 19,692 ------- ------- Past due 90 days or more 4,099 5,389 ------- ------- Total Under-performing Assets $23,582 $25,081 ======= ======= Unper-performing assets as a % of total loans and foreclosed properties 0.53% 0.58% ===== ===== As of March 31, 1999, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 and 118 was $7.9 million with no related allowance and $43.4 million with $9.0 million of related allowance. ONB's policy for recognizing income on impaired loans is to accrue earnings unless a loan becomes nonaccrual. When loans are classified as nonaccrual, interest accrued during the current year is reversed against earnings; interest accrued in the prior year, if any, is charged to the allowance for loan losses. Cash received while a loan is classified nonaccrual is recorded to principal. For the three months ended March 31, 1999, the average balance of impaired loans was $49.2 million and $0.8 million of interest was recorded. ONB's consolidated loan portfolio is well diversified and contains no concentrations of credit in any particular industry exceeding 10% of its portfolio. ONB has minimal exposure to construction lending or leveraged buyouts and no exposure in credits to foreign or lesser-developed countries. Total deposits at March 31, 1999, increased $277.1 million or 6.1% compared to March 1998. Brokered CD's, included in other 10 time, increased $157.9 million since March 1998. Since December 1998, total deposits increased $123.8 million or 2.6% with brokered CD's increasing $109.3 million in this same period. Short-term borrowings, comprised of Federal funds purchased, securities sold under agreements to repurchase and other short- term borrowings, increased $177.8 million since March 1998 and $60.4 million since December 1998. Other borrowings, which is primarily debt from Federal Home Loan Banks, rose $156.3 million over March 1998 and $29.3 million over December 1998. Capital Total shareholders' equity increased $18.7 million since March 1998 and $15.6 million since December 1998. Accumulated other comprehensive income, primarily net unrealized gain on investment securities, decreased $4.3 million since March 1998 and $6.2 million since December 1998. ONB's consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios: <TABLE> <CAPTION> Regulatory Guidelines March31, December 31, Minimum Well-Capitalized 1999 1998 1998 <S> <C> <C> <C> <C> <C> Risk-based capital: Tier 1 capital to total avg assets (leverage ratio) 4.00% 5.00% 7.83% 8.13% 7.94% Tier 1 capital to risk-adjusted total assets 4.00 6.00 11.51 12.20 11.40 Total capital to risk-adjusted total assets 8.00 10.00 13.25 13.99 13.11 Shareholders' equity to total assets N/A N/A 8.06 8.59 8.10 </TABLE> Each of ONB's affiliate banks have capital ratios which exceed regulatory minimum and well-capitalized guidelines. Liquidity and Asset/Liability Management ONB continually monitors its liquidity and actively manages its asset/liability position. The purpose of liquidity management is to match the sources of funds with anticipated customer borrowings and withdrawals and other obligations. The primary purpose of asset/liability management is to minimize the effect on net income of changes in interest rates and to maintain a prudent match within specified time periods of rate-sensitive assets and rate-sensitive liabilities. ONB also uses net interest income simulation modeling to better quantify the impact of potential interest rate fluctuations on net interest income. With this understanding, management can best determine possible balance sheet changes, pricing strategies, and appropriate levels of capital and liquidity which allow ONB to generate strong net interest income while controlling and monitoring interest rate risk. ONB simulates a gradual change in rates of 200 basis points up or down over 12 months and sustained for an additional 12 months. The policy limit for the maximum negative impact on net interest income over 12 months is 10%. At March 31, 1999 the model's fluctuations has not materially changed from December 31, 1998. Using static gap, ONB's rate-sensitive assets at March 31, 1999 were 70% of rate-sensitive liabilities in the 1-180 day maturity category and 76% in the 181-365 day category. These figures compared to 78% and 83% on December 31, 1998 and 76% and 85% on March 31, 1998. ONB's funds management committee meets bi- monthly to closely monitor and effect changes as needed in the consolidated rate-sensitivity position. 11 Year 2000 The national and local press have devoted much coverage to the Year 2000 ("Y2K") issue, also know as the "Millennium Bug". This refers to the possibility that some computers may be unable to recognize the date change at the turn of the century. With the high volume of transactions and electronic data, the banking industry requires extensive computer capabilities to serve its customers. With that in mind, ONB has devoted much attention to its systems to prepare itself for the millennial change. ONB has successfully completed its Y2K compliance testing of its mission-critical computer systems and its core processing systems used to serve its customers. Besides maintaining this status, ONB is managing its third party system relationships, updating disaster and contingency plans, and testing nonmission-critical software. Renovation and testing of software and hardware may not remove all risks related to Y2K. Alternative methods to perform key activities will be addressed through contingency planning. There has been no significant financial impact to ONB as a result of the Year 2000 project. ONB's 1998 Y2K expenses were less than $500 thousand. Much of ONB's software is externally generated with minimal internal software. Much of the software and hardware items have been changed, upgraded, or replaced in preparation for Y2K and have been part of the normal maintenance. While the company will continue testing and implementing secondary systems and replacing certain personal computers through 1999, it does not expect any material impact on earnings associated with these Y2K compliance efforts. Results of Operations Income from Continuing Operations Income from continuing operations for the three months ended March 31, 1999 was $20.0 million, an 11.3% increase from the same period 1998. Basic net income from continuing operations per common share for the first quarter of 1999 was $0.43 compared to $0.39 for 1998. The company's return on average assets (ROA) for the first quarter of 1999 was 1.25% compared to 1.23% for 1998. Return on average equity (ROE) for the quarter was 15.93%, which compares favorably to 1998 ROE results of 14.96%. Growth in net interest income and other income combined with a lower effective tax rate generated the net income improvements. Net Interest Income/Net Interest Margin (taxable equivalent basis) Year-to-date net interest income for 1999 was $58.1 million, a 4.0% increase over 1998. The net interest margin for the quarter was 4.10% and 4.31% for 1999 and 1998, respectively. The lower net interest margin resulted from the lower and flatter yield curve and our investment in bank-owned life insurance discussed in noninterest income. Increases in earning assets offset the declining yields to contribute to an improved net interest income. 12 Provision and Allowance for Loan Losses The provision for loan losses was $2.8 million in the first quarter of 1999 compared to $3.0 million in the first quarter of 1998. ONB's net charge-offs were 0.11% of average loans for the current quarter, compared to 0.15% in the first quarter of 1998. The allowance for loan losses is continually monitored and evaluated both within each affiliate bank and at the holding company level to provide adequate coverage for potential losses. ONB maintains a comprehensive loan review program to provide independent evaluations of loan administration, credit quality, loan documentation, and adequacy of the allowance for loan losses. The allowance for loan losses to end-of-period loans of 1.22% at March 31, 1999 compares to 1.28% in 1998. The allowance for loan losses covers all under-performing loans by 2.3 times at March 31, 1999 compared to 2.0 times at December 31, 1998. Noninterest Income Excluding securities gains (losses), noninterest income increased 6.9% in the three months ended March 31, 1999 as compared to the same period in 1998. Both increases were fueled by several factors. Trust fees were up 7.2% for the first quarter due to continued development of new and current trust business. Income from bank-owned life insurance (BOLI) policies, purchased in March 1998, generated $1.1 million income in the first quarter compared to $0.2 million in 1998. Investment product fees rose over 1998 in excess of 11%. The security gains of $1.3 million were taken to offset a similar level of non-recurring charges incurred in connection with the restructuring of ONB's banks into a single charter. Most other categories of noninterest income were comparable to last year's results. Noninterest Expense Noninterest expense increased 7.2% in the first quarter of 1999 compared to 1998. Salaries and benefits, together the largest individual component of noninterest expense, increased 7.2% in the first quarter of 1999 compared to 1998. Other expense increased 19.2% over the first quarter of 1998. These increases, primarily professional fees were mainly related to the restructuring discussed previously. Most other categories of noninterest expense experienced relatively small changes between the years. Provision for Income Taxes The provision for income taxes, as a percentage of pre-tax income,decreased in the first quarter to 27.8% compared to 30.6% in 1998. Higher levels of BOLI income and other tax exempt income, as well as favorable state taxation developments helped lower our effective rate in the first quarter of 1999. 13 PART II OTHER INFORMATION ITEM 1. Legal Proceedings NONE ITEM 2. Changes in Securities NONE ITEM 3. Defaults Upon Senior Securities NONE ITEM 4. Submission of Matters to a Vote of Security Holders At the April 15, 1999 Annual Meeting of Shareholders, the following matters were submitted to a vote of the shareholders. Election of Directors - The following directors were elected for a term of one year. Vote Count For Against Abstained Unvoted David L. Barning 32,819,456 126,168 -- 13,119,971 Richard J. Bond 32,822,039 122,778 -- 13,120,776 Alan W. Braun 32,794,490 162,866 -- 13,108,238 Wayne A. Davidson 32,809,119 135,998 -- 13,120,476 Larry E. Dunigan 32,828,877 116,157 -- 13,120,557 David E. Eckerle 32,811,183 131,448 -- 13,122,960 Phelps L. Lambert 32,828,642 115,533 -- 13,121,418 Ronald B. Lankford 32,827,563 117,335 -- 13,120,695 Lucien H. Meis 32,773,733 171,126 -- 13,120,734 Louis L. Mervis 32,732,093 213,296 -- 13,120,205 Lawrence Prybil 32,676,149 274,475 -- 13,114,968 James Risinger 32,819,223 128,001 -- 13,118,369 John N. Royse 32,788,481 167,984 -- 13,109,174 Marjorie Z. Soyugenc 32,671,227 277,139 -- 13,117,227 Charles D. Storms 32,829,606 213,025 -- 13,122,960 Selection of Independent Public Accountants - Arthur Andersen LLP, Indianapolis, Indiana Votes For - 32,644,475 Votes Against - - 158,114 Votes Abstained - 175,775, Unvoted - 13,087,229. Approval of the Old National Bancorp 1999 Equity Incentive Plan Votes For - 25,861,479 Votes Against - 2,835,375 Votes Abstained - - 780,317, Unvoted - 16,588,421. ITEM 5. Other Information NONE 14 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits as required by Item 601 of Regulation S-K. (3(ii)) By-Laws of the Registrant, as amended (10) The Old National Bancorp 1999 Equity Incentive Plan, as amended (27) Financial Data Schedule (b) ONB did not file a current report on Form 8-K during the quarter ended March 31, 1999. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OLD NATIONAL BANCORP (Registrant) By: s/s John S. Poelker John S. Poelker Senior Vice President Chief Financial Officer Date: May 14, 1999 16 INDEX OF EXHIBITS Regulation S-K Reference (Item 601) 3(ii) By-Laws of the Registrant, as amended 10 The Old National Bancorp 1999 Equity Incentive Plan, as amended 27 Financial Data Schedule 17